On May 12, President Trump issued an Executive Order (EO) on drug pricing: “Delivering Most-Favored-Nation Prescription Drug Pricing to American Patients.” The EO requires a 30-day government negotiation with drug companies to reach agreement that the companies will provide drugs to American patients at most-favored-nation (MFN) prices. If this process does not lead to significant progress toward MFN prices, government agencies are directed to pursue additional actions.
On Tuesday, May 20, the Trump administration provided more detail, indicating that it expected all brand drugs marketed in the United States without generic or biosimilar competitors to be sold in the United States at the MFN price, which it described as the lowest price offered in an Organization for Economic Co-operation and Development (OECD) country whose per capita gross domestic product (GDP) is 60% or more of the U.S. per capita GDP. If drug companies do not agree to this price voluntarily, the administration said the government will take action to force them to do so.
The Trump administration appears to take the position that it has broad authority to negotiate prices in a significant portion of the U.S. economy even though there is no legislative authority for it to do so (the explicit prohibition on drug price negotiation for Medicare Part D was retained in the 2022 Inflation Reduction Act (IRA), with an exception for the price negotiation process established by the IRA). Instead, to motivate “voluntary” price setting, it threatens retaliation using various authorities, many of which cannot directly achieve the policy objective it seeks. We look at two of these legislative authorities that seem to be most closely linked to reducing drug prices, a rulemaking on MFN pricing and drug importation.
MFN Pricing
he EO offers no specifics about either the scope or statutory basis for a rulemaking to impose MFN pricing. That said, it seems plausible that the Trump administration might rely on the Nov. 27, 2020, rulemaking from the president’s first term to impose MFN pricing on certain drugs within the Medicare Part B program (the 2020 MFN rule). Indeed, the MFN price that the administration identified in its May 20 announcement seems to be based, in part at least, on the MFN price set by the 2020 MFN rule.
The 2020 MFN rule was successfully delayed on procedural grounds (because it was issued as an “interim final” rule without having been previously published) and then withdrawn by the Biden administration. The current administration could republish that document with updates based on more recent data and any relevant policy changes it wishes to make, or even with questions about changes the administration might want to consider making in the final rule (which would provide an argument that the final rule, even if different in scope from the proposed rule, is a “logical outgrowth” of the proposal).
The 2020 MFN rule established a “Medicare Payment Model” under Section 1115A(b) (link) of the Social Security Act (SSA), which was added by the Affordable Care Act and which established the Center for Medicare and Medicaid Innovation Center (CMS Innovation Center). This model would have established—for certain Part B drugs, nationwide, for seven years beginning on Jan. 1, 2021—an alternative payment for such drugs based on an MFN price and an alternative, fixed add-on payment for administration of the drug (instead of price based on average sales price (ASP) and an administration payment of 6% of ASP as provided for under section 1847 of the SSA).
The MFN price was to “be derived from the lowest GDP-adjusted country-level price, based on non-U.S. OECD member countries with a GDP per capita that is at least 60 percent of the U.S. GDP per capita.” At the time of the 2020 MFN rule, for the first year, those countries would have been Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Iceland, Ireland, Israel, Italy, Japan, Republic of Korea, Luxembourg, Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland and the United Kingdom.
The 2020 MFN rule stated that the MFN price would not count as “price available from the manufacturer” and so Medicaid prices would not be directly affected, though it suggested that manufacturers would need to make drugs available to Medicaid at prices competitive with MFN prices. The 2020 MFN rule also said that Medicare Advantage plans would not be MFN participants.
The Trump administration could choose to broaden these parameters: Part D drugs could also be included, as could Medicare Advantage plans and Medicaid (though it is challenging to understand how the section 1115A authority could be used to affect drug prices beyond the Medicare and Medicaid programs). More countries could be included. The methodology for calculating a country’s drug price (which is adjusted based on per capita gross domestic product) could be changed. The time duration of the model could be lengthened. Whatever choices the administration makes, the choice of a model under section 1115A is not reviewable by a court under section 1115A(d)(2)(A).
That said, it is unclear if the administration can set drug prices at all under the section 1115A authority because drug price setting is not enumerated in section 1115A and because drug price setting has “vast political and economic significance.” That is, drug price setting for the large public and private single-source drug market in the U.S. presents a “major question” that requires specific authorization from Congress, which section 1115A seems not to provide. That Congress has legislated a process to negotiate Medicare drug prices in the IRA reinforces the view that drug pricing questions require clear statutory authority from Congress.
A more defensible, yet much more limited, approach would be to pursue MFN prices under the Medicare pricing provision of the IRA. That said, MFN price is not a factor specified in section 1194(e) of the SSA for setting a drug’s “maximum fair price” under the program. This approach, if feasible, would presumably drive prices for certain Medicare drugs lower than currently achieved under the program, though with no direct effect on Medicaid or commercial drug prices.
Drug importation
As compared to the MFN rulemaking portion of the EO, the drug importation portion cites and essentially quotes the statutory basis for action (section 804(j) of the Federal Food, Drug, and Cosmetic Act (FDCA)), in that it requires the Food and Drug Administration (FDA) to issue guidance that would “describe circumstances under which waivers will be consistently granted to import prescription drugs on a case-by-case basis from developed nations with low-cost prescription drugs.” FDA has previously provided guidance on personal drug importation (e.g., https://www.fda.gov/industry/import-basics/personal-importation), yet the administration could adopt a more permissive approach. This approach to importation is different from the approach of the first Trump administration, which issued a regulation to establish a program to permit states to import drugs from Canada; the administration has indicated that it is working to streamline FDA review of proposals from states under this program.
Next steps
We will monitor next steps on drug pricing from the Trump administration and provide additional commentary as developments warrant.
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